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Sharp pick-up in disbursements, but yields soften

* CANF’s 4QFY21 PAT grew 13% YoY to INR1.03b (13% miss). PAT miss was driven by an NII miss (12%) and higher-than-expected opex (31%), offset by lower credit costs (77% below our estimate).

* In FY21, as disbursements declined ~20% YoY, loan book growth fell to 7% from 13% YoY. NII/PPOP/PAT grew by 18-21% YoY in FY21.

Sharp recovery in disbursements…

* CANF was one of the few HFCs whose disbursements had not picked up to YoY levels even by 3QFY21. In 4QFY21, disbursements surpassed YoY levels by ~45% to INR20b. This was a result of the change in the business model to Home loans that are competitively priced to that of Banks and large HFCs. As a result, its sequential loan book growth of 5% was the best in the past 17 quarters.

* Contrary to the trends of the past few years, CANF has been growing more in the salaried customer segment post COVID-19. The share of salaried borrowers increased ~100bp QoQ to 73%.

…but at the cost of yields

* Over the past two quarters, CANF had been disbursing a significant proportion of loans at a rate of ~7%. Around 22% of the loan book is now re-priced at the lower rate. As a result, calculated yields on loans declined 100bp QoQ to 8.6%.

* While this was offset by a decline of ~50bp in the CoF, overall spreads fell to 2.7% from 3.2% QoQ. The management reiterated its guidance of 2.4% spreads and 3% NIM over the near-to-medium term.

* Share of bank borrowings declined 600bp QoQ to 51%. This was offset by an equivalent increase in market borrowings to 26%.

* Pro forma GNPL ratio improved 8bp QoQ to 0.91%. The company maintained 33% PCR on GNPLs. In addition to this, it has 70bp provisions (including COVID-19 provisions) on standard assets.

Highlights from the management commentary

* BT-out used to be INR2.5b earlier. With the management’s new strategy, it fell to INR0.9b in 4QFY21. Similarly, BT-in has tripled from earlier levels.

* Incremental CoF in 4QFY21 was 4.5% and incremental yield was 7.32%. The incremental cost of bank borrowings was 5.5%.

Valuation and view

Over the past three years, CANF’s loan book growth has been declining. While its performance in 9MFY21 was muted as per our expectations, disbursements in 4QFY21 showed a sharp improvement. We now forecast ~14% loan book CAGR over FY21-24E. However, growth has come at the cost of margin, which is expected to decline 50bp YoY in FY22E. As a result, our EPS estimates have been cut by 5-6%. Despite this, the company is poised to deliver healthy (~16%) RoE going forward. We maintain our BUY stance, with a TP of INR660/share (2.5x FY23E BVPS).

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